Ownership guidelines (i.e., policies that place requirements on how many or how long shares of company stock are held by executives) are a way of ensuring that executives have an adequate amount of “skin in the game” when it comes to the long-term success of the company. Equity compensation for executives inherently boosts a personal interest in the company’s growth–the higher the stock price, the higher the reward. However, it can also come with the risk that executives may be prone to more high-stakes behavior that results in short-term returns instead of long-term growth.

Much of the legislation and regulations that has been introduced or finalized over the past year has incorporated some component of risk management and/or “Say-on-Pay.” I suspect that this will result in not only more companies that initiate some form of stock ownership guidelines, but also change the type of policies that we see. Companies must disclose any existing stock ownership policies–shareholders are likely to be on the look for them as they prepare to vote for or against executive compensation.

Types of Ownership Policies

There are basically two ways in which a company can regulate share ownership: how much and how long. This study, published on the 13th by Frederic W. Cook & Co, shows that the most popular policy to be a straight-forward “how much” approach: requiring the executive to hold a minimum amount of shares based a value equal to a multiple of cash salary, a specific number of shares, or a percentage of net profit shares. Unfortunately, this “traditional” ownership policy alone doesn’t necessarily provide the long-term focus that shareholders are looking for, especially if executives may simply leave the company and cash out.

Imposing a holding period on exercised/vested shares extends the amount of time executives are impacted by strategic decisions they make today. Holding periods are typically placed on a percentage of the net shares from transactions. They may range from one year from the transaction date to a period after retirement/termination. (The most popular holding period found in the Frederic W. Cook & Co. study was one year–I’m curious to see what next year’s study will show.)

RiskMetrics Group

The RiskMetrics Group launched its Governance Risk Indicators ^TM (GRId) in March of this year. The rating system in the GRId supports both types of ownership policy, with the highest score going to policies that require a value of shares at 6x salary to be held and a holding period on at least 50% of net profit shares that goes to or beyond retirement/termination.

7th Annual Executive Compensation Conference

If you’ll be in Chicago next week for our 18th Annual NASPP Conference, you’ll have plenty of opportunities to take in great sessions on risk management & “Say-on-Pay”. Also, don’t forget that your registration to the NASPP Conference includes access to the 7th Annual Executive Compensation Conference, which boasts a special “Say-on-Pay” track of panels and sessions addressing executive and director share ownership policies.

If you can’t make the Conferences in person, or you find that you are torn between multiple sessions, don’t forget that we will be recording all the sessions. You will be able to purchase the recorded webcasts individually, as a custom package of five sessions, or get access to the entire set. Even better, it’s not too late to take advantage of the 10% discount!

-Rachel